The S&P 500 is up 21% for the year, but it’s limping to the close. The Omicron variant and rising inflation have forced some investors to the sidelines. US stocks, especially large-cap growth stocks, have been stellar investments for the past few years, but will this trend continue? Below are my five best sector bets for 2022.
Small-Cap Value
Small-cap value stocks have underperformed large-cap growth stocks on a 1-, 3-, 5-, and 10-year basis. Large-cap growth stocks have been up more than 600% for the past decade, while small-cap value stocks returned 176%. The sector is currently trading at a discount to large-cap companies, so hopefully, the tide will turn soon. Vanguard’s Small-Cap Value ETF (VBR) is an excellent way to invest in this category.
International Companies
International stocks have lagged US companies for the past decade by a wide margin. The S&P 500 is up 279%, while the EAFE Index is up a paltry 59%. The return differential has created a wide discount for international companies. A popular investment fund for this category is the iShares MSCE EAFE ETF (EFA).
Emerging Markets
Emerging market stocks have barely budged relative to US companies, especially if they have significant exposure to Chinese companies. If you anticipate inflation to continue, emerging markets could perform well as most of these counties have substantial natural resources. The iShares MSCI Emerging Markets ex-China ETF (EMXC) is an excellent way to invest in this sector.
Home Builders
Homebuilders performed well in 2021, but the trend should continue as millennials and first-time homebuyers flood the market. In addition, a shortage of housing and low rates will continue to fuel the boom. The iShares US Home Construction ETF (ITB) and SPDR® S&P Homebuilders ETF (XHB) are two good investment options for this sector.
Industrial and Material Stocks
Despite Senator Joe Manchin hammering the Build Back Better Bill, our country needs a more robust backbone, including Wi-Fi, roads, rails, and airports. I don’t know what the eventual bill will look like, but our infrastructure needs fixing. A few funds in this sector include the Vanguard Industrials ETF (VIS), Industrial Select Sector SPDR® ETF (XLI), and iShares US Industrials ETF (IYJ).
Markets are in a constant state of flux, so make sure you follow your plan and diversify your assets. A well-balanced portfolio of low-cost index funds exposes you to all the sectors mentioned above.
Successful contrarian investing requires us to live with a discomfort, for being wrong and alone. But bargains do not exist in the absence of fear. ~ Rob Arnott
December 20, 2021
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
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